Institutional Insights: Barcalys FX Thoughts For The Week Ahead

Thoughts for the Week Ahead - Rate risk - This week’s FOMC meeting will likely shift market concern from trade protectionism to the prospect of higher US interest rates and the challenge they may pose to risk assets – questioning the story of synchronised global growth supported by low inflation and gradual policy normalisation. Higher US rates will be particularly concerning for risk-sensitive G10 and EM local market assets if they are accompanied by equity market weakness. Among these, we think the NZD is the most vulnerable G10 currency, given that its high sensitivity to these variables will likely be exacerbated by a lack of real rate advantage, FX overvaluation, and a highly responsive government bond market...
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Institutional Insights: Morgan Stanley FX Pulse

Preparing for a Corrective USD Rebound - Signs not to be ignored. The USD has increased its procyclical behavior recently, weakening in line with the slowdown in US data. Hard and soft data have decelerated, with the Atlanta Fed's GDP tracker down from 5.4% to 1.9% for 1Q. The DXY may still see new index lows over time, but the odds of USD entering into a corrective, tradable rebound have increased. In the unlikely scenario of growth slowing down for good, equity markets may weaken. Related portfolio rebalancing needs could then spill over into cyclical and EM currencies, pushing USD higher. With hindsight, our decision to turn from bullish to neutral on EM on Monday appears timely and risks are tilted toward weakness here...
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